Corporate Social Responsibility (CSR)

What is Corporate Social Responsibility?

CSR is a responsibility of a Company’s towards the community and environment in which it operates. CSR is a way of conducting business, by which corporates contribute to the social good.

Companies contribute for the betterment of our society out of the profit as a mandatory provision under section 135 of Companies Act, 2013 for betterment of our society.

Applicability of CSR Provisions:

Every Company including its holding or subsidiary during the immediately preceding financial year having:

Turnover of Rs. 1000 crore or more, or
Net worth of Rs. 500 crore or more, or
Net Profit of Rs. 5 crore or more.

This provision also apply to the foreign companies having branch office in India and fulfills the above mention conditions.

However, if a company ceases to meet the above criteria for 3 consecutive financial years then the company need not required to comply with these Provisions till such time it meets the specified criteria.

Composition of CSR Committee:

Every Company which fulfills the above mentioned CSR provision shall be required to constitute a CSR Committee.

Committee Consist of 3 or more directors, out of that at least one director shall be an independent director. However, if the company is not required to appoint an independent director then shall have 2 or more directors in the Committee.
CSR Committee Consist of 2 directors in case of a private company.
CSR Committee Consist of at least 2 persons in case of a foreign Company of which one person shall be its authorized person resident in India and another nominated by the foreign company.
However, if the expenditure of the company against CSR is not more than Rs. 50 lakhs, then it is not required to form the committee.

Functions of CSR Committee:

The Corporate Social Responsibility Committee shall,—

(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as per Schedule VII,

(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a),

Responsibility of Board of Directors:

The Board of every company referred to in sub-section (1) shall,—

(a) After taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the Company and disclose contents of such Policy in its report and also place it on the Company’s website, if any, in such manner as may be prescribed; and

(b) Ensure that the activities as are included in Corporate Social Responsibility Policy is undertaken by the company or not; and

(c) Ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

(d) If the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount as clause (o) of sub-section (3) of section 134 of the Companies Act.

For the term above “average net profit” shall be calculated as per the provisions of section 198:

	PARTICULARS	FY
	Net profit after tax*
Add	Allowed Credits
	Profit on sale of Immovable Property (Original Cost – WDV)
Less	Credits Disallowed
	Premium on Shares or Debentures
	Profit on sale of Forfeited Shares
	Profit on sale of Immovable Property (Sale Value – Original Cost)
	Surplus in measurement of asset or liability at fair value
Less	Expenses Allowed
	All the usual working charges
	Director’s Remuneration
	Bonus or Commission paid to Staff
	Tax on excess or abnormal profits
	Tax on business profits imposed for special reasons
	Interest on Debentures
	Interest on Loans
	Expenses on Repairs (other than Capital Expenditure)
	Contributions made under section 181 (Bonafide Charitable Trusts)
	Depreciation
	Prior period items
	Legal liability or compensation or damages
	Insurance Expenses
Add	Expenses Disallowed
	Income Tax
	Compensations, damages, or payments made voluntarily
	Capital Loss on sale of undertaking or part thereof (Not include losses on sale of asset)
	Expenditure in P&L on measurement of asset or liability at fair value

*Net profit after tax is taken as base and accordingly the adjustments need to be considered.

Activities permitted under CSR:

Eradicating extreme hunger and poverty;
Promotion of education;
Promoting gender equality, and empowering women;
Reducing child mortality;
Improving maternal health;
Combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria, and other diseases;
Ensuring environmental sustainability;
Rural development projects
Slum area development.
Protection of national heritage, art, and culture
Employment enhancing vocational skills, social business projects;
Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development, and
Relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, and such other matters as may be prescribed.

Other Important Point:

The Company shall give preference to the local areas around it where it operates, for expenditure earmarked for Corporate Social Responsibility activities.

CSR is not a donation or charity so 80G deduction not allowed on this expenditure.

However, if the expenditure of the company against CSR is not more than Rs. 50 lakhs, then it is not required to form the committee.

Penalty Provision:

The Government has amended the provision of Section 135 through the Companies (Amendment) Act, 2019 and inserted penalty provisions for companies as well as officers in default as follows;

a) Penalty for Companies: The company shall be punishable with a fine which shall not be less than 50,000 rupees and it may extend to 25 lakh rupees, and

(b) Penalty for Officer in default: Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with a fine which shall not be less than 50,000 rupees but it may extend to 5 lakh rupees, or with both.

Income tax Benefits:

It is very much clear that expenditure incurred as CSR is not incurred wholly and exclusively for the purpose of carrying on business so not allowed as tax deduction. But if such expenditures are in nature described in Section 30 to 36 of the Income Tax Act, 1961 shall be allowed as deduction.

THE ABOVE AMENDMENT SHALL BE APPLICABLE FROM 1ST APRIL, 2015